Internship report of BBA on Stress Testing

Internship Report
On
Prepared by-
Sheikh Salah Uddin
Department of Finance,
Jagannath University.
Date of Submission: 02 July 2015.

Stress Testing of Sonali Bank Limited
1
Sonia Munmun
Lecturer
Department of Finance
Jagannath University, Dhaka
Date of Submission: 02 July 2015.
Submitted to:
Submitted by:
Sheikh Salah Uddin
ID: 115290
BBA 5th
Batch
Jagannath University

2
Preface
Anyone can gather theoretical knowledge by learning. But practical knowledge and
theoretical knowledge is fully different. Practical knowledge is required to be achieved to
match theoretical knowledge. In order to gather practical knowledge, all of the Universities
should take effective steps such as internship program for the BBA students.
Internship program is one kind of experience. It is the combined arrangement between the
educational institutions and business organizations operating in the practical field. So the
student of BBA should be pragmatic and should have a firsthand view of the real life business
environment. The objective of the internship program is to produce the learners with
practical organizational environment so that they can tune up themselves for the job in future
and can get an opportunity to reconcile the theoretical knowledge with real life situation. For
this reason, internship program is an indispensable for the BBA program.
As a student of Finance, I was placed in Sonali Bank Limited, Savar Branch, Dhaka. I
decided to write an internship report on “Stress Testing of Sonali Bank Limited” after three
months of internship program.
The best feature of my internship program was the access to a motivated and hard-working
team of highly knowledgeable banking professionals. The most important skill that I learnt
was the ability to work in a team. I also picked up considerable skills in team communication,
communication with the customers, training others, getting trained me, and the ability to
adapt to the ever-changing banking scenario.
In this report, I am extremely grateful to my honorable supervisors, Sonia Munmun, Lecturer
of Jagannath University.
I have tried my best to make this report effective and realistic and my attempt will be fruitful
at that time if anybody is benefited from this one.
Sheikh Salah Uddin
BBA 5th
Batch
Jagannath University
25 April 2015; 06:15 AM

3
Acknowledgement
In the name of Almighty Allah, the most Beneficent, the most merciful.
It is indeed a great pleasure and honor on my part to have the opportunity to submit internship
report after three months practical orientation at Sonali Bank Limited, Savar Branch, Dhaka.
First of all thanks to almighty Allah for enabling me to complete internship report with good
and sound health. I am pleased to express my gratitude to placement committee for arranging
such a program from which I have carried a practical experience.
Internship program is one of the important requirements for the completion of four years
BBA program. I have completed my internship in Sonali Bank Limited (Savar Branch). In
this regard I would like to express my heartiest appreciation to my honorable supervisor
Sonia Munmun, Lecturer, Department of Finance, Jagannath Iniversity for his guidance,
care and valuable suggestions to prepare this report. I would also like to pay my gratitude
to another supervisor, Shamim Ara Begum, Senior Faculty Member, Sonali Bank Staff
College, Sonali Bank Limited for her guidance and cooperation.
I am very much grateful to Professor Dr. M. Abu Misir, Chairman, Department of Finance,
Jagannath University and Dr. Sk. Md. Golam Saklayen, Principal (DGM, Feb ’12 -
Present), Sonali Bank Staff College for practicing internship program in their organizations
and creating the opportunity for me to be trained up with the efficient employees of Sonali
Bank Limited.
This report is being prepared with assistance and support from, Md. Mojibur Rahman (Senior
Officer), Rezwana Parvez, (Senior Offiecr), Muhammad Shamim (Officer-Foreign
remittance), Md. Mosharraf Hossain (Officer & Remittance Management In charge), Md.
Abdul Aziz (Officer-Cash), Rabaka Sultana (Officer-trainee) and specially my beloved wife
Sayeda Hosneara Akter (Student of BBS) for giving me support all the moment of my
attachment time and also for make an attractive working environment which I have really
enjoyed very much.
I feel very pleased to thank all my fellow friends for their cordial cooperation in preparing
this report. Then at last I shall be grateful to those persons who read this report and who will
get benefit from this report at present and future.

4
Letter of Transmittal
02 June 2015
Sonia Munmun,
Lecturer,
Jagannath University, Dhaka.
Subject: Submission of Internship Report.
With due respect, I would like to state that it is a matter of great pleasure and honor for me
to submit my internship report on “Stress Testing of Sonali Bank Limited” assigned as my
topic of internship report. In preparation of this report I have followed and maintained the
format and rules of a formal internship report. The internship program gave the opportunity
to have an insight on the Banking sector of Bangladesh through Sonali Bank Limited.
The Consignment was of great worth and appeal, as it helped me hone my analytical skills
abilities and practical knowledge in the field of credit management and helped me become
familiarized with the corporate world. I have tried heart and soul to make the report effective
and useful.
The internship program was very much valuable to me as it helped me to gain experience
from the practical field. I am grateful to you for providing me this opportunity of gaining
such practical experiences and to know how theoretical knowledge is applied in the real
world.
I, sincerely hope that you will be satisfied with this report. Please accept my report and I will
be glad to clarify any discrepancy that may arise.
Sincerely Yours
Sheikh Salah Uddin
ID: 115290
Reg. No: 1101335290
BBA 4th
Year 2nd
Semester
Jagannath University, Dhaka.

5
Declaration from the Writer
I, Sheikh Salah Uddin, ID: 115290, Registration No: 1101335290, BBA 4th
year 2nd
semester, Department of Finance, Jagannath University, Dhaka hereby declare that this is
the report of internship program titled “Stress Testing of Sonali Bank Limited” is uniquely
prepared by me after the completion of three months’ work hard at Sonali Bank Limited,
Savar Branch, Dhaka. I worked hard and tried my best to make it unique.
I confirm that, the report is only prepared for my academic requirement not for otherwise
purpose. I also assure that this report is not submitted anywhere in the universe before me.
Sheikh Salah Uddin
ID: 115290
BBA 5th
Batch
4th
year 2nd
Semester

6
Declaration from the Supervisor
I, Sonia Munmun, hereby very pleased to declare that Sheikh Salah Uddin, ID no.: 115290,
Registration No: 1101335290, 4th year 2nd semester, Department of Finance, Jagannath
University, Dhaka has been given with the topic “Stress Testing of Sonali Bank Limited”
for researching and writing an internship report on the subject. He has reviewed relevant
literatures and has surveyed for three months to collect both of primary and secondary data.
I have supervised him throughout the preparation of the internship paper.
I certify that the internship paper is an original one and has not been submitted elsewhere
previously for publication in any form.
He is wished all the best in his effort.
Sonia Munmun
Lecturer

7
Declaration from SBSC Supervisor
I, hereby, declare that Sheikh Salah Uddin, ID no.: 115290, 4th year 2nd semester,
Department of Finance, Jagannath University, Dhaka has been given with the topic “Stress
Testing of Sonali Bank Limited” for researching and writing an internship report on the
subject. He worked in Sonali Bank Limited, Savar Branch, Dhaka and has reviewed relevant
literatures and has surveyed for three months to collect both of primary and secondary data.
I have supervised him throughout the preparation of the internship paper.
I also certify that the internship paper is an original one and so this is really a tremendous
effort from him as a student of BBA.
Shamim Ara Begum
Senior Faculty Member (SEO)
Sonali Bank Staff College
Sonali Bank Limited
Plot-6, Sector-8, Uttara, Dhaka

8
Executive Summary
During my stay at the office as an intern, I never felt vague or ambiguous. The environment
of the Sonali Bank Limited is work-friendly. The staffs are specialized in their respective
fields. Each of them works on their own and their id supervised from the top management.
The motivation of the staff, I believe, comes from the very sense of responsibility.
My report is on the basis of the fundamental analysis rather than the general banking. So, I
actually worked there full time, but prepared my report in my room after my work time.
First of all I described all functions and present position of Sonali Bank, then gradually I
entered into the main part of the report through describing the newly invented process of
measuring the financial situation or position of a bank/FI, named Stress Testing.
This report is intended to answer some of the basic questions that may arise as part of the
process of stress testing. The report begins with a discussion of stress testing in a financial
system context, highlighting some of the differences between stress tests of systems and of
individual portfolios and then ends up with the stress test on the basis of financial system of
Sonali Bank Limited. The paper provides an overview of the process itself, from identifying
vulnerabilities, which are called ‘shock’ to constructing scenarios to interpreting the results.
The remaining part consist the analysis (page-56), findings (page-82), recommendations
(page-83) and conclusion (page-86).
I tried to make the report perspicuous and comprehensible for the students and the other
persons who are not related to any part of business and so I used graphical presentation
besides data & calculation tables. As CAR is the main capital risk1 measurable function, all
the risks are converted to CAR (%) to understand the company position if they can recover
that shock using their own capital or not.
I’ve done lots of financial calculations, observed their financial reports & from my working
experience I also gathered knowledge about their administrative processes of managing
different issues. Summarized findings can be found in chapter-6.
1 I expressed capital risk, which means the shortage of existing amount of capital than the
required amount of capital

9
Acronyms and Elaboration
Table 1: Abbreviations used in this report
SL. Acronyms Elaborations
01 AGM Assistant General Manager
02 BB Bangladesh Bank
03 BL Bad/Loss
04 BSEC Bangladesh Securities Exchange & Commission
05 CAR Capital Adequacy Ratio
06 CC Cash Credit
07 CIB Credit Information Bureau
08 CRM Credit Risk Management
09 DF Doubtful
10 DFI Development Finance Institution
11 DGM Deputy General Manager
12 EDS Education Deposit Scheme
13 FDIC Federal Deposit Insurance Corporation
14 FDR Fixed Deposit Ratio
15 FI Financial Institution(s)
16 FO Financial Obligation
17 FSI Financial Soundness Indicator(s)
18 FSV Forced Sale Value
19 GAD General Advance Division
20 GAP Gap Analysis Program
21 GBP Great British Pound
22 ICB Investment Corporation of Bangladesh
23 ICD Industrial Credit Division
24 LLC Limited Liability Company
25 LRA Lending Risk Analysis
26 MDS Medical Deposit Scheme

10
27 MES Monthly Earning Scheme
28 MSS Monthly Saving Scheme
29 MV Market Value
30 MVA Market Value of Asset
31 MVE Market Value of Equity
32 MVL Market Value of Liability
33 NPL Non-Performing Loan
34 OCC Office of the Comptroller of the Currency
35 OD Overdraft
36 RC Regulatory Capital
37 RWA Risk Weighted Asset
38 SBL Sonali Bank Limited
39 SBSC Sonali Bank Staff College
40 SEO Senior Executive Officer
41 SMA Special Mention Account
42 SS Sub-Standard
43 UAE Unites Arab Emirates
44 US United States
45 USA United States of America
46 USD United States’ Dollar
47 VAR Value At Risks
48 WAD Weighted Average Duration
49 WAy Weighted Average Yield

11
Table of Contents
Chapter Contents’ Headings Page
Acknowledgement 4
Letter of Transmittal 5
Declarations 6-8
Executive Summary 9
Acronyms and Elaboration 11
Chapter - 1
Introduction
1.1 Rationale of the study 18
1.2 Initiative 18
1.3 Background of the report 20
1.4 Objective of the report 20
1.5 Scope of the study 21
1.6 Methodology of the study 21
1.7 Sources of Data 23
1.8 Limitations of the study 23
Chapter-2:
Proposition of SBL
2.1 Profile & Status of SBL 25
2.2 Goal of SBL 27
2.3 Background of SBL 27
2.4 Ancillary Services of SBL 28
2.5 Automation status of SBL 30
2.6 Card Facilities of SBL 32
2.7 Foreign Remittance Management 34
2.8 Credit Rating Report of SBL 36
2.9 Islami Banking of SBL 37

12
Chapter-3:
Initiative of Stress Testing
3.1 Stress Testing 42
3.2 Bank Stress Testing 42
3.3 Techniques for Stress Testing 44
3.4 Procedure of Stress Testing 45
3.5 Relationship between Stress Test & Regulations 53
3.6 Importance of Stress Testing 53
Chapter-4:
Stress Testing of
Sonali Bank Limited
4.1 Duration & DGAP of Balance Sheet 56
4.2 Calculation of CAR of SBL 60
4.3 Interest Rate Risk of SBL 61
4.4 Exchange Rate Risk 63
4.5 Credit Risk 64
4.6 Equity Price Risk 70
Chapter 5:
Total Shock from
Stress Testing
5.1 Different Shocks from Stress Testing Scenarios 72
5.2 Cumulative Credit Shock Scenarios of SBL 73
5.3 Cumulative Total Shock of SBL 75
5.4 Liquidity Shock of SBL 79
5.5 When NPL Increases up to Total Capital 80
Chapter-6:
Findings and Decisions
6.1 Findings from the Whole Analysis 82
6.2 Recommendations for Applicable Bodies 83
Conclusion 85
Annex I-X 88-99
References 100

13
Table of the Tables
Table 1: Abbreviations used in this report______________________________________ 9
Table 2: Branch Automation with Computers__________________________________ 29
Table 3: ATM & card services of SBL _______________________________________ 30
Table 4: Charges for transaction from other's booth _____________________________ 32
Table 5: Credit limit of credit cards__________________________________________ 33
Table 6: Information of a 2-year semiannual Bond______________________________ 55
Table 7: Duration calculation of a 2-year semiannual Bond: ______________________ 55
Table 8: Balance Sheet Duration of SBL______________________________________ 56
Table 9: CAR calculation _________________________________________________ 60
Table 10: Interest Rate Shocks _____________________________________________ 61
Table 11: Exchange Rate Risk – if adverse movement in Exchange Rate ____________ 62
Table 12: Credit Shock – increase in NPLs____________________________________ 64
Table 13: Credit Risk – Downward shift in NPLs’ Categories _____________________ 65
Table 14: Credit Shock – Fall in the FSV of Mortgaged Collateral _________________ 66
Table 15: Credit Risk – Increase in NPLs’ under B/L category in a sector ___________ 67
Table 16: Credit Shock – Increase in NPLs’ due to Top 8 large loan borrowers’ failure _ 68
Table 17: Equity price Risk – Fall in Stock Prices ______________________________ 69
Table 18: Aggregate of 5 types of Credit Shocks _______________________________ 72
Table 19: Total shock of Sonali Bank Limited _________________________________ 74
Table 20: Liquidity Shock – Fall in Liquid Liabilities ___________________________ 78
Table 21: Shock of NPL increases up to total capital ____________________________ 79
Table 22: Findings from whole analysis ______________________________________ 81

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Table of the Figures
Figure 1: Methodology Framework.....................................................................................20
Figure 2: Formation history of Sonali Bank Limited ..........................................................27
Figure 3: Different SMS Services........................................................................................30
Figure 4: Banner for Islamic Banking of SBL.....................................................................39
Figure 5: Procedure of Stress Testing..................................................................................44
Figure 6: Parts of Stress Testing..........................................................................................45
Figure 7: Credit Risk includes these parts of management .................................................46
Figure 9: Relationship between Stress Test & Bank Regulations .......................................52
Figure 10: Interest Rate Shock in CAR ...............................................................................61
Figure 11: Foreign exchange rate shock..............................................................................62
Figure 12: Credit Shock – increase in NPLs........................................................................64
Figure 13: Credit shock -downward shift of NPL categories ..............................................65
Figure 14: Credit Shock – Fall in the FSV of Mortgaged Collateral...................................66
Figure 15: Credit Risk – Increase in NPLs’ under B/L category in a sector .......................67
Figure 16: Credit Shock – Increase in NPLs’ due to Top 8 loan borrowers’ failure...........68
Figure 17: Equity price Shock .............................................................................................69
Figure 18: Imagine how stress on your pencil damages what percent of that.....................71
Figure 19: Aggregate of 5 types of Credit Shock Scenarios................................................72
Figure 20: Cumulative Credit Shock in Scenario-1.............................................................73
Figure 23: Total shock of Sonali Bank Limited ..................................................................75
Figure 24: Parts of Cumulative Total Scenario-1 ................................................................76
Figure 25: Parts of Cumulative Total Scenario-2 ................................................................76
Figure 26: Parts of Cumulative Total SCenario-3 ...............................................................77

15

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Abstract
Stress testing is one of the effective and popular ways to alert bank management with regard
to adverse unexpected outcomes related to variety of risks and provides an indication how
much capital adequacy ratio (CAR) might be needed to absorb losses if any large shocks
occur. In this paper, Sonali Bank Limited is considered, operates in Bangladesh based on
BB rules. Besides that, several indicators for conducted stress testing of non-performing loan
(NPL), non-performing loan in two major sectors, equity price risk, liquidity shocks and
Interest rate shocks. This study has been used the data for the years of 2013 and 2014 taken
from the annual report of SBL. Finally, this study has some interesting implications that
might help the senior management, policy makers, depositors, owners as well as stakeholders
of the bank.
Key words
Stress Testing, Credit Risk, Non-performing loan, NPL in major sectors, Equity Price Risk,
Liquidity Risk, Interest Rate Risk, Financial soundness, Sonali Bank Limited
1.1 Rationale of the Study:
For the completion of this internship program I have chosen a bank, named “Sonali Bank
Limited” and my internship report is based on “Stress Testing of Sonali Bank Limited”. I
have prepared this report under Sonia Munmun, Lecturer, Department of Finance, Jagannath
University. During the study period, generally students gain theoretical knowledge but now
a days, in the job market there is no substitute of principle work experience. Therefore,
before getting any job, students should have some real world experience in the major field
of study on the career choice so that the employers get interested about the employees. This
report has given me a chance to raise my quality in developing research instrument and its
applications. By doing this I can boost my acceptability in job market and develop my real
life experience.
1.2 Initiative:
Banks play the most important role in the economy. Banks collect money from the
individuals and lend them to others. Now banks offer the widest range of financial services
and perform lots of financial functions. Thus banks have proven that they are the key factor

17
for the business and economy as well. It is of vital importance to understand and appreciate
the risks the banking industry is exposed to so that soundness and sustainability of the
industry can be ensured.
In the regulatory and supervisory sphere, the Central Bank's activities in banking supervision
have often been determined by exogenous elements deriving mainly from the changes in the
structure and scope; activities and risks that the financial sector is facing and the changes in
regulatory standards occurring internationally. The recent financial turmoil in the US
financial system has augmented the importance of establishing more developed risk
management regime in the financial industry. Present risk management culture based on
normal business conditions and historical trends is not enough to cope with the disorders that
have happened in the financial systems globally. This required an appropriate response in
the regulatory and supervisory activities of the Central Bank.
Financial institutions around the world are increasingly employing stress testing to determine
the impact on the financial institution under a set of exceptional, but plausible assumptions
through a series of battery of tests. Bangladesh Bank has designed a stress testing framework
for banks and FIs to proactively manage risks in line with international best practices.
Keeping in view with the divergence of skill levels and available resources among banks
and FIs, a modest beginning focused with simple sensitivity and scenario analysis
considering only credit risk and market risk is suggested in the Stress Testing Guideline
published from BB, eventually to develop into a more comprehensive approach. All banks
and FIs are expected to carry out stress testing on half‐yearly.
Stress Testing has got the impressive attentions in the last few decades as to measure the
level of economic confrontation and to alert bankruptcy hazard caution of the financial
institutions, commercial banks.
The internship report comprises a brief study on the financial system of Sonali Bank Limited
during three months internship. The report is divided in many departments according to
nature and requirement of the topic and according to the instructions of my supervisors.
1.3 Background of the report:
The business world is getting dynamic and competitive. It is hard for an organization to run
& even survive in a fast paced, growing and uncertain world if it cannot keep tracks with the

18
go of business dynamism. Business plays and links important roles in developing the
economy of a country. So, as a business graduate, I think I need to be attached with any
organization to get a handy & versatile experience about the business world before starting
our career. Internship is the arrangement, which makes a bridge between our academic
knowledge and practical world to have an acquaintance with the real business world as well
as to gear me up to lead the future competitive business. I have worked in Different divisions
of SBL, Savar Branch, Dhaka. In this report, I will try to make an overall analysis on the
financial risks of SBL.
1.4 Objectives of the study:
The objective of the study is to gather practice of all knowledge regarding financial sector
and operations. Theory classes of B.B.A provide us theories regarding financial sector and
practical orientation gives us the opportunity to feel those systems and their operations. More
precisely these objectives can be identified:
1.4.1 Major objective:
Gathering and analyzing the data in a view to testing the stress of SBL.
1.4.2 Minor objectives:
 To gather the practical experience based on the theoretical knowledge.
 To be habituated with the corporate environment and culture.
 To fulfill the internship program.
 To maintain the overall banker-customer relationship.
 To evaluate the financial performance of Sonali Bank Limited.
 To understand and analyze the financial strength of SBL through Stress Testing.
 To point out the major findings of the report & provide some valuable
recommendations based on them.

19
1.5 Scope of the Study:
As I was an intern, my scope was limited and restricted for some purpose. I had maintained
some official formality for the collection of data of my report. This study will give a clear
idea about the financial performance of Sonali Bank Limited as well as the risks and stresses
faced by Sonali Bank Limited. In addition, you can know the financial position of the bank
in the banking industry based on its last year’s performance. These are the major scopes of
this report:
 Understand the present position of SBL
 Know about the new idea of Stress Testing
 Know the stress levels of SBL
 Apply these data into your investment portfolios in bank industry
 Follow the recommendations to improve the financial system.
1.6 Methodology of the Report:
Method of my report is designed in such a way so that it correspondent to achieve the
objectives of the study.
Type: As I am going to test the stress of Sonali Bank Limited to manage its risks, so I have
to describe its whole management process of stresses over risk by analyzing some financial
and statistical data.
So, from my point of view, it is an analytical report.
Data collection and analysis were made during the Internship period at Sonali Bank Limited.
The methodology framework is likely as the flowchart shown below-

20
Figure 1: Methodology Framework
In order to analyze collected data, I have used statistical software that can run different
statistical test. Also I have used MS-Excel to calculate and generate charts and graph of
different analysis. The data has been presented through graphs for better visual
understanding.
Methodology
Framework
Primary Data Secondary Data
Research at Bank &
Home
Reporting the
Findings &
Recommendations
Internship at SBL
Internship under
Supervisors

21
1.7 Sources of Data:
For smooth and accurate study everyone has to follow some rules and regulations in order
to collect right data for the right process. I had collected data from both the primary source
and secondary source. These sources are:
1.7.1 Primary Sources:
 Practical desk work.
 Face to face dialogue with officers.
 Face to face conversation with the Sonali Bank Staff College Supervisor.
 Facing some practical situation related with the day to day banking activities.
1.7.2 Secondary Sources:
 Annual Reports (2013, 2014) of Sonali Bank Limited.
 Website of SBL.
 Brochures.
 Other business websites.
 Papers & journals about the Central bank CMS requirement.
 Text books
1.8 Limitations of the Study:
Any research work needs high degree of involvement regarding collection of information,
creation of data base, literature review and analysis of data. While doing so, many limitations
arise even though I always tried my best to avoid these limitations. In conducting the present
study, the following limitation has been faced:
 The main constrain of the study was insufficiency of information. The personnel of
the organization did not want to disclose the classified information to maintain bank
restrictions.
 I have faced major limitation in the financial projection as my estimate was rather
informative base than of actual one.
 As I worked full time during the internship period, time is another hindrance to make
an in depth study on such a critical issue
 I had to attend the final examination of 4th
year 2nd
semester during the internship
period and so it was not possible to prepare report or collect data during these weeks.

22
 Primary data is always hard to work on because of authenticity.
 Due to time limitation many of the aspects could not be discussed in the present
report. Learning all the functions within just 90 days is really tough.
 Since the bank personnel were very busy, they could not provide enough time to me,
lack of opportunity to visit more than one branch.
 The functions and activities of Sonali Bank Limited are too vast, so fully classified
information could not be collected without being the head accountant or DGM. As a
result I can’t collect updated or very recent information & strategy.
 As I had to consult with my supervisors in two different places and though I am
capable of visiting those places, in spite of my home is in savar, there was a huge
time-waste while visiting those places twice or more times during the preparation of
report.

23

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2.1 Corporate Profile and Status:
Sonali Bank Limited is the largest state bank of Bangladesh. Sonali bank Limited follows
the rules and regulation prescribed by the Bangladesh bank. The functions cover a wide
range of banking and functional activities to individual, firms, corporate bodies,
multinational agencies and the rural area. Here is the present status of Sonali Bank Limited:
Name of the Company : Sonali Bank Limited
Chairman : Fazle Kabir
CEO and Managing Director : Pradip Kumar Dutta
Company Secretary : A.K.M Sajedur Rahman Khan
Legal Status : Public Limited Company
Genesis : Emarged as Nationalised Commercial Bank in 1972,
following the Bangladesh Bank (Nationlisation) Order No.
1972(PO No.26 of 1972)
Date of Incorporation : 03 June, 2007
Date of Vendor's Agreement : 15 November, 2007
Registered Office : 35-42&44, Motijheel Commercial Area, Dhaka,
Bangladesh
Authorised Capital : Taka 6,000.00 core
Paid-up Capital : Taka 3,120.00 core*
Number of Employee : 22,052* (Decreased 1061 in this year)

As in SBL Monthly ‘At-a-Glance’ of February 2015.

25
a) Officers : 19,199* (Decreased 693 in this year)
b) Staffs : 2,853* (Decreased 368 in this year)
Number of Branches : 1204*
a) Foreign Branches : 02*
b) Local Branches : 1202
i. Rural : 860*
ii. Urban : 342*
Treasury Branches : 594*
Authorized Dealers : 45*
Exchange Houses : 58* (increased 2 in this year)
Regional Offices : 19*
Principal Offices : 42*
General Managers’ Offices : 11* (increased 1 in this year)
Representative Offices : 3*
Contact:
Phone-PABX : 9550426-31, 33, 34, 9552924
FAX : 88-02-9561410, 9552007
SWIFT : BSONBDDH
Website : www.sonalibank.com.bd
E-mail : itd@sonalibank.com.bd


26
2.2 Goal of SBL:
There are three levels of goal of Sonali Bank Limited. Such as-
2.2.1 Vision:
Socially committed leading banking institution with global presence.
2.2.2 Mission:
Dedicated to extend a whole range of quality products that support divergent needs of people
aiming at enriching their lives, creating value for the stakeholders and contributing towards
socio-economic development of the country.
2.2.3 Slogan:
Your trusted partner in innovating banking.
2.3 Background of Sonali Bank Limited:
Soon after independence of the country Sonali Bank emerged as the largest and leading
nationalized commercial bank by proclamation of the Bank’s Nationalization Order 1972
(Presidential order- 26 ) liquidating the then National Bank of Pakistan, Premier Bank and
Bank of Bhawalpur. As a fully state owned institution, the bank had been discharging its
nation- building responsibilities by undertaking government entrusted different
socioeconomic schemes as well as money market activities of its own volition, covering all
spheres of the economy.
The bank has been converted to a Public Limited Company with 100% ownership of the
government and started functioning as Sonali Bank Limited from November 15, 2007 taking
over all assets, liabilities and business of Sonali Bank. After corporatization, the
management of the bank has been given repaired autonomy to make the bank competitive&
to run its business effectively.
Sonali bank limited is governed by a Board of Directors consisting of 13 (thirteen) members.
The Bank is headed by the Chief Executive Officer & Managing Director, who is a well-
known Banker and a reputed professional. The corporate head quarter of the bank is located
at Motijheel, Dhaka, Bangladesh and the main commercial center of the capital.

27
Figure 2: Formation history of Sonali Bank Limited
2.4 Ancillary Services:
Sonali Bank Limited offers multiple special services with its network of branches throughout
the country in addition to its normal banking operations.
2.4.1 Collection:
o Gas bills.
o Electricity bills.
o Telephone bills.
o Water/Sewerage bills.
o Municipal holding Tax.
o Passport fees, visa fees and Travel tax.
o Customs & Excise duties.
o Source tax and VAT.
o Jakat fund.
o Hajj deposit.
o Land development tax
1972
National Bank
of Pakistan1949
The Bank of
Bahwalpur
Limited
The
Premier
Bank
Limited

28
2.4.2 Payment:
o Pension of employees of Government and other Corporate Bodies.
o Bangladesh Bank employees’ pension.
o Army pension.
o British pension.
o Students' stipend/scholarship.
o Govt. & Non-Govt. Teachers' salary.
o Food procurement bill on behalf of the Govt.
2.4.3 Social Services:
o Old age allowances.
o Widows, divorcees and destitute women allowances.
o Freedom Fighters' allowances.
o Maternal allowances for poor women.
o Disability allowances.
2.4.4 Sale & Encashment/Purchase:
o Savings Certificates.
o ICB Unit Certificates.
o Prize Bonds.
o Wage Earner's Development Bonds.
o US Dollar Premium & Investment Bond.
o Lottery tickets of different Semi-Govt. and Autonomous Bodies.
o Sanchaypatra.
o Public Service Commission's application form.
o Judicial Service Commission's application form.
o Exchange of soiled / torn notes.

29
2.4.5 Misc. Services:
 Bank a/c information of tax payer client according to demand of NBR.
 Local Governance Support Project.
 Enlist of Non-Government Insurance Company.
2.5 Automation status:
2.5.1 Branch Computerization:
1148 branches are. Out of 1194 branches at home, 1179 branches have already been entered
in the automation network.
Table 2: Branch Automation with Computers
Status title Number of branch
On live Operation 1193 (increased 1 in this year)
*
Under Process 7
ABB 1184 (increased 3 in this year)
2
2.5.2 Foreign Remittance:
Bank's own in-house software "Remittance Management System" (RMS+), having, among
others, the feature of paying foreign remittance instantly over the counter is being
implemented at all branches. This web based software provides digital services to the
expatriates through its unique advantage of sending confirmation message to the mobile
phone of the remitter/beneficiary.
2.5.3 ATM:
Sonali Bank Limited is a member of Q-Cash ATM network. At present the bank has 53 ATM
booths. Sonali Bank's ATM cardholders enjoy the access to the ATMs and POS of Dutch
*2

30
Bangla Bank Ltd. and Brac Bank Ltd. besides those of Q-Cash consortium. Sonali Bank
recently launched Credit Card.
Table 3: ATM & card services of SBL
ATM Status title Number
ATM facilities 64
Debit card issued 54442 (increased 1525 in 2015)
3
Credit card issued 969 (increased 23 in 2015)
4
2.5.4 Online and SMS Banking: At present109 branches of Sonali Banks are included
in the Online Any Branch Banking (ABB) network. SMS Banking service is running in 73
branches. The bank is seriously working on connecting all branches in the Real-time Online
Banking network gradually. Branches having ABB facility are also rendering SMS banking
services.
Figure 3: Different SMS Services
3
4

31
2.6 Card Facilities of Sonali Bank Limited:
2.6.1 Debit Card Facilities:
Sonali Bank Limited is one of the member bank of Q-Cash Consortium. Card holder of
Sonali Bank Limited can use ATMs of consortium member banks, Dutch-Bangla bank and
BRAC bank limited. Member Banks of Q-Cash Consortium:
 Sonali Bank Limited  Eastern Bank Limited
 Basic Bank Limited  Jamuna Bank Limited
 IFIC Bank Limited  Markentile Bank Limited
 Janata Bank Limited  NCC Bank Limited
 National Bank Limited  Shahjalal Islamic Bank Limited
 Pubali Bank Limited  The City Bank Limited
 Trust Bank Limited  Standard Bank Limited
 ICB Islamic Bank Limited  Uttara Bank Limited
 Social Islamic Bank Limited  Bank Asia Limited
 Bangladesh Commerce Bank
Limited
 Mutual Trust Bank Limited
 State Bank of India
Debit and Credit card holder of Sonali Bank Limited can use under mentioned ATM Booth
and shopping center and Point of Sale (POS):

32
Table 4: Charges for transaction from other's booth
Other Bank Transaction Charges per Transaction including VAT:
22 Q-Cash Member Banks
Omnibus Network (Brac Bank)
Dutch Bangla Bank
Tk 11.50
Tk 17.25
Tk 34.50
Other Information:
Yearly charge for Debit Card is = Tk 345.00 (Including VAT)
Duplicate Card issue is case of lost = Tk 200.00
Card Division Address:
Card Division ,
Sonali Bank Limited,
Head Office (4th floor),
Dhaka - 1000.
Contact no: 9560366, 01755583687
Emali Address: sblho.card@sonalibank.net.bd
2.6.2 Credit Card Facilities:
Sonali Bank Limited has introduced proprietary credit card. At present officers of the bank
are entitled to enjoy credit card facility. Other than this, officer of Government, Semi-
Government, Autonomous organizations, Teachers and Officers of the Government
Universities are also entitled for Sonali Credit card whose salary is disbursed from issuing
branches of Sonali Bank Limited.

33
Table 5: Credit limit of credit cards
Credit Limit
Equivalent to 3 (Three) Months Basic Salary for Officers of Government, Semi-
Government, Autonomous organizations or other customers.
I. General Manager and Above
II. Deputy General Manager & Assistant
General Manager
III. SEO
IV. Executive Officer
V. Senior Officer & Officer
Tk. 3,00,000.00
Tk. 2,00,000.00
Tk. 1,50,000.00
Tk. 1,00,000.00
Tk. 75,000.00
Conditions:
 Yearly charge for Credit Card (Customer) Tk = 575.00 (Including VAT)
 Yearly charge for Credit Card (Bank Employee) Tk = 345.00 (Including VAT)
 Only TIN holder is eligible for Credit card facility.
 Credit card holder can enjoys 100% of loan limit either from ATM or POS.
 Rate of interest is 1.50% on daily product & monthly basis.
 Charge will be applicable for remote on-us transactions.
 In case of POS no interest will be charged if outstanding liabilities are paid within
the stipulated time. This time is 50 days from date of statement.
2.7 Foreign Remittance Management:
Here is the list of the name of exchange houses / banks
 Bahrain Financing Company
 Zenj Exchange Co. W.L.L.
 Nationa Finance Exchange Co,
Bahrain
 Hamdan Exchange Canada
 Al Rajhi Commercial Foreign
Exchange
 Al Amoudi Exchange Company

34
 National Commercial Bank
 Al Mulla International Exchange
Co.W.L.L.
 Al Muzaini Exchange Co. K.S.C.C.
 Al Moosa Exchange Company
W.L.L.
 Bahrain Exchange Company W.L.L
 City international exchange co.
W.L.L.
 Dollarco Exchange co. Ltd.
 Kuwait Bahrain International Ex.
Co. W.L.L.
 National money exchange co.
W.L.L.
 Oman exchange company ltd.,
kuwait
 U.A.E. Exchange centre W.L.L.
 May Bank, Malaysia 26 IME (M)
SDN.BHD
 Bank Muscat S.A.O.G.
 Gulf overseas exchange co. L.L.C.
 National Bank Of Oman
 Oman International Exchange
L.L.C., oman
 Oman & Uae Exchange Centre & co.
L.L.C.
 Eastern Exchange Eastablishment
 Trust exchange company W.L.L.
 Al Dar For Exchange Works, Qatar
 Balaka Exchange Pte Ltd
 Eastern union remittance &
exchange ltd., U.K.
 British Arab Commercial Bank
 Habib exchange co. L.L.C.
 Mashreq Bank Psc
 Al Rostamani International
Exchange Company
 U.A.E. Exchange centre L.L.C.
 Wall street exchange centre L.L.C.
 Ridha Al Ansari Exchange
Establishment
 Al Ahalia Money Exchange Bureau
 Lari Exchange Establishment
 Global Exchange Italia Srl, Italy,
USA
 Trans-fast remittance L.L.C., france
 Western Union
 Dalil Exchange
 NBL SDN Malaysia
 Al-Rajhi Bank
 Arab National Bank
 Arabian Exchange
 Bank Al Bilad, K.S.A.
 Al. Jamil Exchange Co.
 Daulat enterprise inc.
 Indian Bank, Singapore
 Al Ansari Exchange
 Al falah exchange, U.A.E.
 Al Ghurair Exchange, Italy
 Bank Al-Jazira ,K.S.A.
Total no. of exchange houses/banks = 54, (bank = 12 and Exchange house = 42)

35
2.8 Credit Rating Report of Sonali Bank Limited:
The credit rating report of Sonali Bank Limited is published by the head office of the
organization. The report is very simple to understand and very significant for the investors.
So, the report is given below without any changes made, same to the real report published
or announced from the head office of the organization.
As per Bangladesh Bank’s mandatory requirement vide BRPD circular number-06, dated: 5
July 2006, credit rating of Sonali Bank Limited was done by the Alpha Credit Rating Limited
on the audited balance sheet as on 31/12/2013 and other related information, given below:
Head Office,
Sonali Bank Limited.

36
2.9 Islami Banking of Sonali Bank Limited:
Sonali Bank limited has started Islamic Banking activities in consideration with the
increasing demand & expectation of religious Muslims. It is completely based on Islamic
Shariah. A high profiled Shariah supervisory committee consists of reputed Islamic scholars,
Economists & Bankers, has been working for proper & fair Islamic Banking activities.
2.9.1 Establishment of Islamic Windows in Sonali Bank Limited:
Sonali Bank Limited as the largest state owned commercial bank has commenced its Islamic
Banking operation since 29 June 2010 at the following five branches with separate window.
 Fakirapool branch,Dhaka
 Agrabad corporate branch, Chittagong
 Khulna corporate branch, Khulna
 Bogra corporate branch, Bogra
 Dargagate corporate branch, Sylhet
2.9.2 Aims & Objectives:
The aims and objectives of Islamic Banking are-
 To facilitate the online Shariah based banking at the door step of the religious
Muslims
 To establish an excellent Islamic Banking System by direct participation in sincere
& public welfare Banking, ensuring a proper & developed financial Management,
based on Islamic Shariah.
 To bring dynamism in Islamic banking by utilizing the well versed experience &
good will of Sonali Bank Limited.
 To encourage the savings, following direct Investment.
 To create more employment facilities by inspiring project Investment.

37
2.9.3 Functions of Islamic Banking:
The Islamic Banking windows are performing the following banking activities through on-
line banking-
1. Collection of Deposits
2. Investment Assistance
2.9.3.1. Deposit Collection Activities:
The windows are taking deposit through different types of accounts. There are mainly two
types of deposit accounts:
a) Al-Wadeeah A/C
b) Mudaraba A/C
2.9.3.1.a. Al-Wadeeah Current A/C :
Islamic Banking Windows operates Al- Wadeeah current A/C, based on Al- Wadeeah policy
of Islamic Shariah. In this policy bank undertake to make payment of A/C holders money on
demand & A/C holders permits the bank to utilize his/her money. A/C holders can make
transactions randomly No profit given by the bank & no loss beared by the A/C holder.
2.9.3.1.b. Mudaraba A/C:
As per Mudaraba policy of Islamic Shariah the following A/Cs are being maintained.
i. Mudaraba Savings Deposits
ii. Mudaraba Special Notice Deposit
iii. Mudaraba Term Deposit
iv. Mudaraba Hajj Savings
v. Mudaraba Sonali Monthly Deposit Scheme(SMDS)
vi. Mudaraba Monthly Profit Scheme(MMPS)

38
In these accounts ‘Bank’ is treated as ‘Mudarib’ and client is treated as ‘Sahib Al Mal’. Bank
receives deposit from the depositors and invest it as per Shariah Law and distribute
(minimum 65%) profit earned for the Mudaraba fund as weigtage basis at the end of the
year.
2.9.3.1.b.iv. Mudaraba Haj Savings A/C :
This type of A/C is an opportunity to those Muslims who are interested to perform holy Haj
(Pilgrim) but unable to manage the required fund at a time, by savings fixed monthly
installment for the particular period of time from 1 year to 20 year, the person concerned can
build the fund.
2.9.3.2. Investment Activities:
In Islamic Banking System the following types of investment are being done -
A. Trading:
i. Bi-Murabaha
ii. Bi-Muazzal
iii. Bi-Salam
iv. Bi-Istisna
B. Partnered ownership or Hire Purchase under Shirkatul Milk (HPSM)
2.9.3.2.A.i. Bai-Murabaha (Sale in profit as per contact):
Sale in profit on purchased value in consent of both Bank & Client, Called Bi- Murabaha.
2.9.3.2.A.iii. Bi-Salam(Advanced purchase):
The business contract in which bank made advanced payment against the supply of
commodities in a future stipulated period of time is called Bi- Salam. On taking delivery of
the commodities on the specified time the bank can sale these to other party.
2.9.3.2.A.iv. Bi-Istisna:
A contract between seller & Buyer under which seller/supplier undertake to supply on
manufacturing the particular goods to the buyer/receiver is called Bi-Istina. The details of

39
contract i,e, value, nature, pattern, class, Amount, Place, Time & mode of payment, carrying
cost etc must be mentioned in the contract.
2.9.3.2.B. Hire-Purchase under Shirkatul Milk:
The contract made by bank & Clients jointly to purchase vehicle, Machineries & Equipments
, building , Apartment etc.wherein client utilize the same rental basis & made the payment
of Bank portion on installment & acquire the ownership proportionately, is called Hire
Purchase under shirkatul –Milk. The actual value, monthly rent, Value of bank’s portion,
payment schedule, securities etc. is settled before the purchase agreement made.
The following Services are being provided by the Islamic windows:
 On-line Real Time Banking facilities.
 Payment order issue.
 Remittance facilities through DD/TT etc.
People can contact to have any information or discussion/suggestion at any time to our
nearby window or Islami Banking Department.
Tel: 88-02-9556608,
website: www.sonalibank.com.bd
Figure 4: Banner for Islamic Banking of SBL

40

41
3.1 Definition of Stress Testing:
Stress testing is a simulation technique, which are used to determine the reactions of different
financial institutions under a set of exceptional, but plausible assumptions through a series
of battery of tests. At institutional level, stress testing techniques provide a way to quantify
the impact of changes in a number of risk factors on the assets and liabilities portfolio of the
institution. For instance, a portfolio Stress Testing makes a rough estimate of the value of
portfolio using a set of exceptional but plausible events in abnormal markets.
At the system level, stress tests are primarily designed to quantify the impact of possible
changes in economic environment on the financial system. The system level stress tests also
complement the institutional level stress testing by providing information about the
sensitivity of the overall financial system to a number of risk factors. These tests help the
regulators to identify structural vulnerabilities and the overall risk exposure that could cause
disruption of financial markets. Its prominence is on potential externalities and market
failures.
However, one of the limitations of this technique is that stress tests do not account for the
probability of occurrence of these exceptional events. For this purpose, other techniques, for
example VAR (value at risks) models etc. are used to supplement the stress tests. These tests
help in managing risk within a financial institution to ensure optimum allocation of capital
across its risk profile.
3.2 Definition of Bank Stress Testing:
An analysis conducted under unfavorable economic scenarios which are designed to
determine whether a bank has enough capital to withstand the impact of adverse
developments. Stress tests can either be carried out internally by banks as part of their own
risk management, or by supervisory authorities as part of their regulatory oversight of the
banking sector. These tests are meant to detect weak spots in the banking system at an early
stage, so that preventive action can be taken by the banks and regulators.
In depth, Stress tests focus on a few key risks – such as credit risk, market risk, and liquidity
risk – to banks' financial health in crisis situations. The results of stress tests depend on the
assumptions made in various economic scenarios, which are described by the International
Monetary Fund as "unlikely but plausible." Bank stress tests attracted a great deal of

42
attention in 2009, as the worst global financial crisis since the Great Depression left many
banks and financial institutions severely under-capitalized.
Large international banks began using internal stress tests in the early 1990s. In 1996, the
Basel Capital Accord was amended to require banks and investment firms to conduct stress
tests to determine their ability to respond to market events.
However, up until 2007, stress tests were typically performed only by the banks themselves,
for internal self-assessment. Beginning in 2007, governmental regulatory bodies became
interested in conducting their own stress tests to insure the effective operation of financial
institutions. Since then, stress tests have been routinely performed by financial regulators in
different countries or regions, to insure that the banks under their authority are engaging in
practices likely to avoid negative outcomes. In India, legislation was enacted in 2007
requiring banks to undergo regular stress tests. In October 2012, U.S. regulators unveiled
new rules expanding this practice by requiring the largest American banks to undergo stress
tests twice per year, once internally and once conducted by the regulators. Starting in 2014,
midsized firms are also being required to conduct Dodd-Frank Act Stress Testing. In 2012,
federal regulators also began recommending portfolio stress testing as a sound risk
management practice for community banks or institutions that were too small to fall under
Dodd-Frank's requirements. The Office of the Comptroller of the Currency (OCC) in an
October 18, 2012, Bulletin recommends stress testing as means to identify and quantify loan
portfolio risk. The FDIC made similar recommendations for community banks.
Extreme market movements or crises in the past reveal the inadequacy of managing risks
based only on normal business conditions and historical trends Current financial turmoil
have augmented the importance of better understanding of potential vulnerabilities in the
financial system and the measures to assess these vulnerabilities for both the regulators and
the bankers. The regulators and managers of the financial system around the globe have
developed a number of quantitative techniques to assess the potential risks to the individual
institutions as well as financial system. A range of quantitative techniques that could serve
the purpose is widely known as ‘stress testing’. IMF and Basel Committee on banking
supervision have also suggested for conducting stress tests on the financial sector.

43
3.3 Techniques for Stress Testing:
3.3.1 Simple Sensitivity Analysis:
Simple Sensitivity Analysis (single factor tests) measures the change in the value of portfolio
for shocks of various degrees to different independent risk factors while the underlying
relationships among the risk factors are not considered. For example, the shock might be the
adverse movement of interest rate by 100 basis points and 200 basis points.
Its impact will be measured only on the dependent variable i.e. capital in this case, while the
impact of this change in interest rate on NPLs or exchange rate or any other risk factor is not
considered.
3.3.2 Scenario Analysis:
Scenario Analysis encompasses the situation where a change in one risk factor affects a
number of other risk factors or there is a simultaneous move in a group of risk factors.
Scenarios can be designed to encompass both movements in a group of risk factors and the
changes in the underlying relationships between these variables (for example correlations
and volatilities). Stress testing can be based on the historical scenarios, a backward looking
approach, or the hypothetical scenario, a forward‐looking approach.
3.3.3 Maximum Shock Scenario:
Extreme Value or Maximum Shock Scenario measures the change in the risk factor in the
worst‐case scenario, i.e. the level of shock which entirely wipes out the capital.
3.3.3.i. Assumptions behind each Scenario:
The Stress Testing at this stage is only a single factor sensitivity analysis. Each of the five
risk factors has been given shocks of three different levels. The magnitude of shock has been
defined separately for each risk factor for all the three levels of shocks.

44
3.4 Procedure of Stress Testing:
The process of calculating Stress Testing contains some components which are measured
from the company’s financial data. This specific procedure is guided by the central bank of
Bangladesh, BB. These components are:
a) Measuring Credit Risk
b) Interest Rate Risk
c) Exchange Rate Risk
d) Equity Price Risk and
e) Liquidity Risk
So, we can see the Procedure of Stress Testing through this relation figure:-
Figure 5: Procedure of Stress Testing
So, there are main four work-steps to complete Stress Testing, best seen as a process: part
investigative, part diagnostic, part numerical, and part interpretive. Ideally, this process
begins with the identification of specific vulnerabilities or areas of concern, followed by the
construction of a scenario in the context of a consistent macroeconomic framework. The
next step is to map the outputs of the scenario into a form that is usable for an analysis of
financial institutions’ balance sheets and income statements, then performing the numerical
Credit
Risk
Interest
Rate Risk
Exchange
Rate Risk
Equity
Price Risk
Liquidity
Risk
 BS Positions
 DGAP
 MVE
 Increase in the NPLs
 Shift in the NPLs
 Fall in FSV
 Some Extreme Events

45
analysis, considering any second round effects, and finally summarizing and interpreting the
results. We can see these steps as following figure:
Figure 6: Parts of Stress Testing
3.4.1 Credit Risk:
Credit risk refers to the risk that a borrower will default on any type of debt by failing to
make required payments. The risk is primarily that of the lender and includes lost principal
and interest, disruption to cash flows, and increased collection costs. The loss may be
complete or partial and can arise in a number of circumstances.
The Stress Testing for credit risk assesses the impact of increase in the level of
nonperforming loans of the bank/FI. This involves six types of shocks:
 The first deals with the increase in the Non-Performing Loans and the respective
provisioning. The three scenarios shall explain the impact of 1%, 2% and 3% of the total
performing loans directly downgraded to bad/loss category having 100% provisioning
requirement.
 The second deals with the negative shift in the NPLs categories and hence the increase in
respective provisioning. The three scenarios shall explain the impact of 50%, 80% and
100% downward shift in the NPLs categories. For example, for the first level of shock
50% of the SMA shall be categorized under substandard, 50% of the substandard shall be
categorized under doubtful and 50% of the doubtful shall be added to the bad/loss
category.
Investigation Diagnostics
Interpretion Analytics

46
 The third deals with the fall in the forced sale value (FSV) of mortgaged collateral. The
forced sale values of the collateral shall be given shocks of 10%, 20% and 40% decline
in the forced sale value of mortgaged collateral for all the three scenarios respectively.
 The fourth deals with the increase of the NPLs in particular 1 or 2 sector i.e. garments &
Textiles and the respective provisioning. The three scenarios shall explain the impact of
5%, 7.5% and 10% performing loans of particular 1 or 2 sectors directly downgraded to
bad/loss category having 100% provisioning requirement.
 The fifth deals with the increase of the NPLs due to default of Top 10 large borrowers
and the respective provisioning. The three scenarios shall explain the impact of 5%, 7.5%
and 10% performing loans of Top 10 large borrowers directly downgraded to bad/loss
category having 100% provisioning requirement.
 The sixth deals with extreme events in which due to increase in the certain percentage of
NPLs, the whole capital position of a bank will be wiped out to offset the increased
amount of provision due to cover respective loan losses. The forced sale value of the
collaterals and tax‐adjusted impact of the additional required provision (if any) will be
calibrated in the CAR for the each scenario under all categories.
Figure 7: Credit Risk includes these parts of management

47
3.4.2 Interest Rate Risk:
The assessment of interest rate risk is a very large topic at banks, thrifts, saving and loans,
credit unions, and other finance companies, and among their regulators. The widely deployed
CAMELS rating system assesses a financial institution's: Capital adequacy, Assets,
Management Capability, Earnings, Liquidity, and Sensitivity to market risk. A large portion
of the Sensitivity in CAMELS is interest rate risk. Much of what is known about assessing
interest rate risk has been developed by the interaction of financial institutions with their
regulators since the 1990s. Interest rate risk is unquestionably the largest part of the
Sensitivity analysis in the CAMELS system for most banking institutions. When a bank
receives a bad CAMELS rating equity holders, bond holders and creditors are at risk of loss,
senior managers can lose their jobs and the firms are put on the FDIC problem bank list.
Interest rate risk is the potential that the value of the on‐balance sheet and the off-balance
sheet positions of the bank/DFI would be negatively affected with the change in the interest
rates. The vulnerability of an institution towards the adverse movements of the interest rate
can be gauged by using duration GAP analysis.
The banks and FIs shall follow the following steps in carrying out the interest rate stress
tests:
 Estimate the market value of all on‐balance sheet rate sensitive assets and liabilities
of the bank/DFI to arrive at market value of equity
 Calculate the durations of each class of asset and the liability of the on‐balance sheet
portfolio Arrive at the aggregate weighted average duration of assets and liabilities
 Calculate the duration GAP by subtracting aggregate duration of liabilities from that
of assets.
 Estimate the changes in the economic value of equity due to change in interest rates
on on‐balance sheet positions along the three interest rate changes.
 Calculate surplus/(deficit) on off‐balance sheet items under the assumption of three
different interest rate changes i.e. 1%, 2%, and 3%
 Estimate the impact of the net change (both for on‐balance sheet and off‐balance
sheet) in the market value of equity on the capital adequacy ratio (CAR).

48
Market value of the asset or liability shall be assessed by calculating its present value
discounted at the prevailing interest rate. The outstanding balances of the assets and
liabilities should be taken along with their respective maturity or re-pricing period,
whichever is earlier.
3.4.3 Duration GAP Analysis:
Duration is the measure of a portfolio’s price sensitivity to changes in interest rates. Longer
the duration, larger the changes in the price for a given change in the interest rates. Larger
the coupon, lower would be the duration and smaller would be the change in the price for a
given change in the interest rates. The duration is measured as:
D =
∑
t × CFt
(1 + YTM)t
n
t=1
∑
CFt
(1 + YTM)t
n
t=1
Where,
CFt = cash flow at time t,
t = the number of periods of time until the cash flow payment,
YTM = the yield to maturity1 of the security generating the cash flow, and
n = the number of cash flows.
The duration GAP indicates how the market value of equity (MVE) of a bank/FI will change
with a certain change in interest rates. If the weighted average duration of assets exceeds the
weighted average duration of liabilities (leverage‐adjusted), the duration GAP is said to be
positive.
A positive duration gap signifies that the assets are relatively more interest rate sensitive
than liabilities. Hence if the interest rates rise, the value of assets will fall proportionately
more than the value of liabilities and the market value of equity will fall accordingly and
vice versa.

49
The duration GAP is measured by comparing the weighted average duration of assets with
the weighted average duration of liabilities (leverage‐adjusted, this takes into account the
existence of equity as a means of financing assets).
The weighted average duration of assets and liabilities is calculated as follows:
Weighted Average Duration of Assets (DA) = ∑ 𝑊𝑎 𝐷 𝑎
n
a
Weighted Average Duration of Liabilities (DL) = ∑ 𝑊𝑙 𝐷𝑙
m
l
Where,
𝑊𝑎 = market value of the asset “a” divided by the market value of all the assets
𝑊𝑙 = market value of the liability “l” divided by the market value of all the liabilities
𝐷 𝑎 = duration of the asset “a”
𝐷𝑙 = duration of the liability “l”
n = total number of assets
m = total number of liabilities
Duration Gap will be calculated as under:
DGAP = DA −
MVL
MVA
× DL
The change in market value of equity shall be calculated as:
∆MVE ≅ (−DGAP) ×
∆i
(1 + y)
× TA
∆𝑖 = The change in the interest rate
y = The weighted average yield to maturity of all the effective assets.
The impact of interest rate change on interest bearing off‐balance sheet contracts shall be
separately calculated. As a first step, the actual market price of each contract shall be
determined which should represent the actual price of the contract if sold immediately.
The second step involves calculating the market price again by marking to market each
contract separately assuming a change in interest rate. The difference between the two
market prices would determine the amount of revaluation surplus or deficit. The revaluation

50
surplus would arise if the actual market price of the contract is less than the price calculated
after assuming a change in the interest rate and revaluation deficit would result in, if
otherwise. The revaluation surplus/deficit arising due to the change in the interest rates of
the off‐balance sheet contracts should be subtracted/ added to the fall in market value of
equity derived by the DGAP approach to arrive at the net change in the market value of
equity.
The impact of this net change in the market value of equity will then be calibrated in the
CAR. The tax‐adjusted impact of this net fall (if any) in the MVE shall be adjusted from the
regulatory capital and the risk‐weighted assets and the revised CAR shall be calculated under
each of the above scenarios.
3.4.4 Exchange Rate Risk :
Exchange Rate Risk (also known as FX Risk, Foreign Exchange Risk or Currency Risk) is
a financial risk that exists when a financial transaction is denominated in a currency other
than that of the base currency of the company. Foreign exchange risk also exists when the
foreign subsidiary of a firm maintains financial statements in a currency other than the
reporting currency of the consolidated entity. The risk is that there may be an adverse
movement in the exchange rate of the denomination currency in relation to the base currency
before the date when the transaction is completed. Investors and businesses exporting or
importing goods and services or making foreign investments have an exchange rate risk
which can have severe financial consequences; but steps can be taken to manage the risk.
The Stress Testing for exchange rate assesses the impact of change in exchange rate on the
value of equity. To assess foreign exchange risk the overall net open position of the bank/FI
including the on‐balance sheet and off‐balance sheet exposures shall be charged by the
weightage of 5%, 10% and 15% for minor, moderate and major levels respectively. The
overall net open position is measured by aggregating the sum of net short positions or the
sum of net long positions; whichever is greater. The impact of the respective shocks will
have to be calibrated in terms of the CAR. The tax‐adjusted loss if any arising from the
shocked position will be adjusted from the capital. The revised CAR will then be calculated
after adjusting total loss from the risk‐weighted assets of the bank/FI.

51
3.4.5 Equity Price Risk :
Equity risk is the financial risk involved in holding equity in a particular investment. Equity
risk often refers to equity in companies through the purchase of stocks, and does not
commonly refer to the risk in paying into real estate or building equity in properties.
The measure of risk used in the equity markets is typically the standard deviation of a
security's price over a number of periods. The standard deviation will delineate the normal
fluctuations one can expect in that particular security above and below the mean, or average.
However, since most investors would not consider fluctuations above the average return as
risk, some economists prefer other means of measuring it.
The Stress Testing for equity price risk assesses the impact of the fall in the stock market
index. Appropriate shocks will have to be absorbed to the respective securities if the current
market value of all the on balance sheet and off balance sheet securities listed on the stock
exchanges including shares, NIT units, mutual funds etc. falls at the rate of 10%, 20% and
40% respectively. The impact of resultant loss will be calibrated in the CAR.
3.4.6 Liquidity Risk :
Liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the
market to prevent a loss. Liquidity risk arises from situations in which a party interested in
trading an asset cannot do it because nobody in the market wants to trade for that asset.
Liquidity risk becomes particularly important to parties who are about to hold or currently
hold an asset, since it affects their ability to trade.
The Stress Testing for liquidity risk evaluates the resilience of the banks towards the fall in
liquid liabilities. The ratio “liquid assets to liquid liabilities” shall be calculated before and
after the application of shocks by dividing the liquid assets with liquid liabilities. Liquid
assets are the assets that are easily turned into cash without the threat of loss. They include
cash, balances with Bangladesh Bank and balances with banks, call money lending, lending
under repo and investment in government securities. Liquid liabilities include the deposits
and the borrowings. Appropriate shocks will have to be absorbed to the liquid liabilities if
the current liquidity position falls at the rate of 10%, 20% and 30% respectively. The ratio
of liquid assets to liquid liabilities shall be re‐calculated under each scenario.

52
3.5 Relationship between Stress Test and the Banking Regulations:
Financial Institutions need to take a broad and integrated view of regulatory capital. Here is
the core relationship between Stress Testing and the banking regulations:
I.
3.6 Importance of Stress Testing:
Stress Testing is becoming an important tool to assess potential vulnerabilities in a financial
system. Stress Testing is a way of revaluing a portfolio using a different set of assumptions.
The object of a Stress Testing is to understand the sensitivity of the portfolio to changes in
various risk factors. The assumed changes in risk factors are usually made large enough to
impose some “stress” on the portfolio.
Stress tests can be applied to both the asset and liability sides of a portfolio. They can be
used to assess a variety of risks, including market risk (the possibility of losses from changes
in prices or yields), credit risk (potential for losses from borrower defaults or
nonperformance on a contract), and liquidity risk (the possibility of depositor runs or losses
from assets becoming illiquid). For example, instead of valuing a portfolio using current
market values for interest rates, foreign exchange rates, and equity prices, a Stress Testing
could involve valuing the same balance sheet using a different set of market prices.
Regulatory
Capital
Stress
Testing
Enhanced
Prudential
Supervision
Early remediation
framework is based
on capital ratio
thresholds
Projected capital
ratios are a key
component of
stress test results
Figure 8: Relationship between Stress Test & Bank Regulations

53
More complex stress tests involving multiple risk scenarios or changes in the
macroeconomic environment still amount to the same thing: revaluing a portfolio under a
different set of assumptions.
All banks and FIs are expected to carry out stress testing on half‐yearly basis. Many training
programs are being arranged by different organizations and institutions.
Stress tests can involve changes in almost any aspect of a portfolio, including the prices used
to calculate market values; as well as the duration, liquidity, default rates, and recovery rates
assumed for the portfolio. Stress tests can also be used to examine the impact of changes in
the operating environment beyond changes in these parameters. For example, stress tests can
be employed to assess the impact of changes in prudential regulations, stricter enforcement
of provisioning rules, or a different accounting treatment of allowable capital.
Stress tests usually produce a numerical estimate of the change in value of the portfolio. This
change in value is often expressed in terms of the impact on some measure of capital, to
understand the sensitivity of the net worth of the institution to the risk being considered.
Each stage of the process is important to understanding the sensitivity of a financial system
to a particular shock or vulnerability. These stages are not necessarily sequential, as some
modification or review of each component of the process may be desirable as work
progresses.
As a starting point the scope of the Stress Testing is limited to simple sensitivity analysis.
Five different risk factors namely; interest rate, forced sale value of collateral, non‐
performing loans (NPLs), stock prices and foreign exchange rate have been identified and
used for the stress testing. Moreover, the liquidity position of the institutions has also been
stressed separately. Though the decision of creating different scenarios for stress testing is a
difficult one, however, to start with, certain levels of shocks to the individual risk
components have been specified considering the historical as well as hypothetical movement
in the risk factors.

54

55
4.1 Duration & DGAP of Balance Sheet:
To measure the interest rate risk of an organization, one has to analyze the Duration GAP &
Price Sensitivity of the organization. Then calculate the weighted average yield and then the
change in MVE of the organization.
4.1.1 Duration:
Suppose, we are calculating this type of bond, semiannual, maturity of two years:
Table 6: Information of a 2-year semiannual Bond
FV ৳ 1,41,75,29,060.00
Coupon 10%
yield 11.40%
n 2
m 2
MV ৳ 1,38,29,08,324.52
The D (Duration) will be calculated in the following way:
Table 7: Duration calculation of a 2-year semiannual Bond:
P t CF PV of CF PVCF*t
1 0.5 ৳ 7,08,76,453.00 ৳ 6,70,54,354.78 ৳ 3,35,27,177.39
2 1 ৳ 7,08,76,453.00 ৳ 6,34,38,367.81 ৳ 6,34,38,367.81
3 1.5 ৳ 7,08,76,453.00 ৳ 6,00,17,377.31 ৳ 9,00,26,065.96
4 2 ৳ 7,08,76,453.00 ৳ 5,67,80,867.84 ৳ 11,35,61,735.68
4 2 ৳ 1,41,75,29,060.00 ৳ 1,13,56,17,356.78 ৳ 2,27,12,34,713.56
৳ 1,38,29,08,324.52 ৳ 2,57,17,88,060.40
So, Duration will be: (PVCF*t)/PVofCF:
D = 1.859695263
4.1.2 Duration GAP of Sonali Bank Limited:
To calculate the Duration GAP of Sonali Bank Limited, at first it is needed to calculate the
average asset and liabilities and the market values. Interest rate risk shall be assessed using
simple duration analysis. Duration for all the assets and liabilities shall be calculated using
the formula already described. Given below is the table showing the duration of the balance
sheet:

56
Stress Testing
Name of the Bank: Sonali Bank Limited
For the year ended on 31 December 2014
Balance Sheet Duration
Table 8: Balance Sheet Duration of SBL
Property and Assets Book Value Coupon
Repricing
Period
Yield to
Maturity
Market Value Janu-
2015
Duration WAD WAy
Cash ৳ 53,38,20,74,145.00 ৳ 53,38,20,74,145.00
Balance with Others ৳ 39,83,83,84,042.00 ৳ 39,83,83,84,042.00
Money at call and short notice ৳ 9,22,55,82,000.00 ৳ 9,22,55,82,000.00
Investment
Held to maturity (HTM):
2 Years BGTB ৳ 10,59,79,23,601.00 8.00% 2 8.40% ৳ 10,52,13,46,167.06 1.8871 0.0009 0.10%
5 Years BGTB ৳ 18,45,53,75,734.00 10.00% 5 9.40% ৳ 18,88,91,95,908.91 4.0665 0.0825 0.19%
10 Years BGTB ৳ 29,03,79,02,292.00 10.00% 10 10.72% ৳ 27,77,40,11,917.05 6.4590 0.1926 0.33%
15 Years BGTB ৳ 9,25,99,44,430.00 10.00% 15 11.40% ৳ 8,33,83,25,107.03 7.7079 0.0690 0.11%
20 Years BGTB ৳ 8,46,77,39,398.00 10.00% 20 11.97% ৳ 7,21,03,93,269.48 8.2155 0.0636 0.11%
Held for Trading (HFT)
2 Years BGTB ৳ 8,24,19,11,345.00 8.00% 2 8.40% ৳ 8,18,23,57,752.68 1.8871 0.0166 0.07%
5 Years BGTB ৳ 35,21,19,80,099.00 10.00% 5 9.40% ৳ 36,03,96,88,382.25 4.0665 0.1573 0.35%
10 Years BGTB ৳ 16,70,75,05,624.00 10.00% 10 10.72% ৳ 15,98,03,02,421.26 6.4590 0.1108 0.19%
15 Years BGTB ৳ 1,41,75,29,060.00 10.00% 15 11.40% ৳ 1,27,64,45,905.30 7.7079 0.0106 0.02%

57
Property and Assets Book Value Coupon
Repricing
Period
Yield to
Maturity
Market Value Janu-
2015
Duration WAD WAy
20 Years BGTB ৳ 91,37,42,958.00 10.00% 20 11.97% ৳ 77,80,64,340.99 8.2155 0.0069 0.01%
Other Investments ৳ 1,84,41,53,72,210.00 ৳ 1,84,71,18,90,632.00
Loans and advances:
Cash Credit hypo ৳ 37,03,16,03,404.00 15% 1 15% ৳ 37,03,16,03,404.00 1.0000 0.0398 0.57%
Personal Loan ৳ 6,22,99,30,616.00 16% 4 16% ৳ 6,22,99,30,616.00 2.7663 0.0185 0.10%
Bittahin MCD ৳ 10,14,75,786.00 11% 2 11% ৳ 10,14,75,786.00 1.9009 0.0002 0.00%
BRB Crop Loan ৳ 8,66,69,08,085.00 10% 2 10% ৳ 8,66,69,08,085.00 1.9091 0.0178 0.09%
Special Small Loan ৳ 63,55,29,829.00 12% 3 12% ৳ 63,55,29,829.00 2.6901 0.0018 0.01%
Small Loan ৳ 41,81,83,459.00 14% 1 14% ৳ 41,81,83,459.00 1.0000 0.0004 0.01%
Staff Loan ৳ 48,21,78,72,881.00 5% 10 5% ৳ 48,21,78,72,881.00 8.1078 0.4197 0.26%
Swanirvor Loan ৳ 2,98,88,982.00 11% 1 11% ৳ 2,98,88,982.00 1.0000 0.0000 0.00%
Falaz/Banaz Nursery ৳ 34,92,08,01,471.00 10% 3 10% ৳ 34,92,08,01,471.00 2.6257 0.0984 0.37%
Other Loans & Advances ৳ 2,01,30,22,38,630.00 ৳ 2,01,30,22,38,630.00
Fixed asset ৳ 32,76,75,68,369.00 ৳ 32,76,75,68,369.00
Other asset ৳ 1,39,09,73,46,696.00 ৳ 1,39,09,73,46,696.00
Total Asset ৳ 9,34,59,23,15,146.00 _ 10.88% ৳ 9,31,56,74,10,199.01 4.1932 1.3073 2.90%
(For detailed maturity calculation, please see Annex-I) P.T.O.
Property and Labilities Book Value Coupon
Repricing
Period
Yield to
Maturity
Market Value Janu-
2015
Duration WAD WAy

58
Borrowing from bank/FI ৳ 88,17,09,418.00 ৳ 88,17,09,418.00
Deposit and other accounts
Current & Other a/c ৳ 1,62,52,93,78,799.00 ৳ 1,62,52,93,78,799.00
Bills Payables: ৳ 12,67,63,41,550.00 ৳ 12,67,63,41,550.00
Savings Bank Deposits ৳ 1,89,69,60,05,800.00 5% 0.25 5% ৳ 1,89,69,60,05,800.00 0.2500 0.0542 0.0108
Fixed Deposits
On Demand ৳ 43,88,48,92,958.67 ৳ 43,88,48,92,958.67
1 Month ৳ 37,04,59,04,197.30 ৳ 37,04,59,04,197.30
6 Months ৳ 43,08,62,21,793.78 0.50 ৳ 43,08,62,21,793.78 0.5000 0.0246 0.0000
1 Year ৳ 41,23,04,43,442.97 8.50% 0.50 8.50% ৳ 41,23,04,43,442.97 0.5000 0.0236 0.0040
5 Years ৳ 92,77,37,32,024.90 10% 0.50 10% ৳ 92,77,37,32,024.90 0.5000 0.0530 0.0106
10 Years ৳ 1,55,11,97,67,734.38 12% 0.50 12% ৳ 1,55,11,97,67,734.38 0.5000 0.0886 0.0213
Subordinated Loans (if any)
Liabilities against Assets subje
ct to Finance lease (if any)
Other Liabilities ৳ 96,08,88,73,462.00 ৳ 96,08,88,73,462.00
Total Liabilities ৳ 8,75,01,32,71,181.00 8.88% ৳ 8,75,01,32,71,181.00 0.45 0.2440 4.67%
Equity ৳ 59,57,90,43,966.00 Off-Balance Sheet
৳ 2,29,92,97,38,014.00
Total liability and Equity ৳ 9,34,59,23,15,147.00 (Contingent Liability)

59
Now, return to the equations applied here:
Weighted Average Duration of Assets (DA) = ∑ 𝑊𝑎 𝐷 𝑎
n
a
= 1.3073
Weighted Average Duration of Liabilities (DL) = ∑ 𝑊𝑙 𝐷𝑙
m
l
= 0.2440
So, the most desired Duration GAP,
DGAP = DA −
MVL
MVA
× DL
= 1.078080941
Here, the duration of assets exceeds the duration of liabilities, which signifies that assets are
more price sensitive than that of liabilities and certain rise in interest rate would cause greater
decrease in the value of assets leading to decrease in the market value of equity.
4.2 Calculation of CAR of SBL:
CAR is the well-known term for any manager of an organization. This is not a four-wheeler
vehicle. The full version is- Capital Adequacy Ratio, also known as Capital to Risk
(Weighted) Assets Ratio (CRAR). CAR is the ratio of a bank's capital to its risk. It is
expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to
protect depositors and promote the stability and efficiency of financial systems around the
world.
Two types of capital are measured: Tier-One capital, which can absorb losses without a bank
being required to cease trading, and Tier-Two capital, which can absorb losses in the event
of a winding-up and so provides a lesser degree of protection to depositors.
The formula for CAR is like this:
CAR =
(T1 + T2)
RWA
T1=Tier-1, T2=Tier-2 and RWA=Risk Weighted Asset.

60
Table 9: CAR calculation
Dec-14 Dec-13
Regulatory Capital
Tire-1 ৳ 31,21,12,73,048.00 ৳ 14,14,08,32,808.00
Tire-2 ৳ 18,37,45,97,380.00 ৳ 14,14,08,32,808.00
Total ৳ 49,58,58,70,428.00 ৳ 28,28,16,65,616.00
RWA ৳ 4,05,26,43,00,000.00 ৳ 3,72,39,09,00,000.00
CAR (%) 12.24% 7.59%
Required CAR (%) 12.00% 10.00%
CAR Surplus (-Deficit) 0.24% -2.41%
4.3 Interest Rate Shock:
Now, the change in MVE can be calibrated into this CAR. Return to the equation of change
in MVE,
∆MVE ≅ (−DGAP) ×
∆i
(1 + y)
× TA
y is calculated for assets thus- (for calculating WAy of liabilities, just use ‘l’ rather than ‘a’
and ‘TL’ in place of ‘TA’)
𝑊𝐴𝑦 = ∑
(𝑦 × 𝑎)
𝑇𝐴
Where,
WAy = Weighted Average of yield
y = yield (percent point)
a = related asset amount
TA = Total Asset
This is the main part of the calculation. Now calculate surplus/(deficit) on off‐balance sheet
items under the assumption of three different interest rate changes i.e. 1%, 2%, and 3%. The
impact of the net change (both for on‐balance sheet and off‐balance sheet) in the market
value of equity on the capital adequacy ratio (CAR) should be estimated in the next step.
And now, the impact shall be calibrated in CAR as follows:

61
Table 10: Interest Rate Shocks
Magnitude of Shock
Scenario-1 Scenario-2 Scenario-3
1% increase 2% increase 3% increase
Weighted Average yield
on asset 2.90% 2.90% 2.90%
Total Asset ৳9,31,56,74,10,199 ৳9,31,56,74,10,199 ৳9,31,56,74,10,199
Duration Gap 1.078080941 1.078080941 1.078080941
Fall in MVE (on-
Balance sheet) ৳ 9,75,97,83,589 ৳ 19,51,95,67,179 ৳ 29,27,93,50,768
Fall in MVE (on & off
balance sheet) ৳ 11,61,49,71,482 ৳ 23,22,99,42,964 ৳ 34,84,49,14,446
Tax adjusted loss ৳ 6,67,86,08,602 ৳ 13,35,72,17,204 ৳ 20,03,58,25,807
Revised CAR (%) 10.76% 9.24% 7.67%
Fall in CAR (% points) 1.47% 2.99% 4.56%
(For detailed calculation, please see Annex-II)
For simplicity, this shock represents a parallel upward shift in the yield curve. Here we can
see that up to 4.56% fall in the CAR happens for the worst case scenario of interest rate
shock. The related graph is shown below.
Figure 9: Interest Rate Shock in CAR
12% 12.24%
10.76%
9.24%
7.67%
0%
2%
4%
6%
8%
10%
12%
14%
Required Current 1% change 2% change 3% change
CAR(%)
increase in interest rates
Interest Rate Shock
Required
Current
1% change
2% change
3% change

62
4.4 Exchange Rate Shock
The impact of change in the exchange rate on CAR is like below:
Table 11: Exchange Rate Risk – if adverse movement in Exchange Rate
Magnitude of Shock
5% increase 10% increase 15% increase
Net Exposure in FX ৳ 11,17,45,47,154 ৳ 11,17,45,47,154 ৳ 11,17,45,47,154
Loss on Exchange Rate Change ৳ 55,87,27,358 ৳ 1,11,74,54,715 ৳ 1,67,61,82,073
Tax adjusted loss ৳ 32,12,68,231 ৳ 64,25,36,461 ৳ 96,38,04,692
Revised CAR (%) 12.17% 12.10% 12.03%
Fall in CAR 0.07% 0.14% 0.21%
(For detailed calculation, please see Annex-III)
It is easy to see that up to 0.21% fall in the CAR happens for the worst case scenario of
foreign exchange rate shock. The related graph is shown below.
Figure 10: Foreign exchange rate shock
12.24%
12.1658%
12.0961%
12.0262%
11.90%
11.95%
12.00%
12.05%
12.10%
12.15%
12.20%
12.25%
12.30%
Current 5% change 10% change 15% change
CAR(%)
increase in exchange rates
Foreign Exchange Rate Shock
Current
5% change
10% change
15% change

63
4.5 Credit Shock:
There are 6 (Six) kind of shocks in credit risk, those are-
i. Increase in NPLs
ii. Shift in NPLs categories
iii. Fall in FSV of Mortgaged Collateral
iv. Increase of NPLs in particular 1 or 2 sectors
v. Increase of NPLs due to default of Top loan borrowers and
vi. Increase in NPLs up to that position in which whole capital will be wiped out.
In those shocks, last most shock should not be calculated with other shocks because that one
removes all capital and shows CAR as 0.00%. So, in the cumulative shock scenarios, credit
shock number-vi should be avoided.
4.5.1 Increase in NPLs
In this type of scenarios, performing loan directly downgraded to bad/loss category, 1%, 2%
or may be 3%.
The amounts of classified mortgaged collateral can be found by using the base of provision
for every class of NPL and the percentage of provision in the annual financial report of
Sonali Bank Limited.
So, that calculation is like the equation below:
𝑀𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑐𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 𝑆𝑆 = 𝐵𝑎𝑠𝑒 𝑜𝑓 𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 𝑆𝑆 − 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑁𝑃𝐿 𝑆𝑆
So, the other two types are very easy, just use the values of ‘DF’ and ‘B/L’ in the place of
‘SS’.

64
The impact on CAR is like below-
Table 12: Credit Shock – increase in NPLs
Magnitude of Shock
1% 2% 3%
NPLs to Loans (%) 25.42% 25.42% 25.42%
Increase in NPL ৳ 86,43,66,400 ৳ 1,72,87,32,800 ৳ 2,59,30,99,200
Increase in Provisions (after ad
justment of eligible securities)
৳ 86,43,66,400 ৳ 1,72,87,32,800 ৳ 2,59,30,99,200
Tax adjusted provision (not yet a
pplicable for credit risk)
৳ 86,43,66,400 ৳ 1,72,87,32,800 ৳ 2,59,30,99,200
Revised CAR (%) 12.05% 11.86% 11.67%
Revised NPLs to loan 25.67% 25.93% 26.18%
Fall in CAR (%) 0.19% 0.38% 0.57%
Increase in NPL to Loan (%) 0.25% 0.51% 0.76%
(For detailed calculation, please see Annex-IV)
Here, up to 0.57% fall in the CAR happens for the worst case scenario of credit shock. The
related graph is shown below.
Figure 11: Credit Shock – increase in NPLs
12.24% 12.05% 11.86% 11.67%
0.25% 0.51% 0.76%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Current 1% increase 2% increase 3% increase
CAR(%)
increase B/L in NPLs
Shock of increase in NPLs
Revised CAR (%)
Increase in NPL to Loan (%)
Expon. (Increase in NPL to
Loan (%))

65
4.5.2 Downward shift in NPLs categories:
The impact of shift in NPLs to next categories with no change in total NPLs shall be
accounted for as follows:
Table 13: Credit Risk – Downward shift in NPLs’ Categories
Magnitude of Shock Scenario-1 Scenario-2 Scenario-3
50% shift 80% shift 100% shift
Weighted Amount of
provision
৳ 51,93,14,95,000 ৳ 51,33,53,40,000 ৳ 51,33,53,40,000
WA Provision after shift in
categories
৳ 80,67,45,93,338 ৳ 83,36,55,59,922 ৳ 85,15,95,37,645
Increase in Provision ৳ 28,74,30,98,338 ৳ 28,74,30,98,338 ৳ 33,82,41,97,645
Revised CAR (%) 5.54% 4.70% 4.24%
Fall in CAR (% point) 6.70% 7.53% 7.99%
(For detailed calculation, please see Annex-V)
So, up to 7.99% fall in the CAR happens for the worst case scenario of NPL shock. The
related graph is shown below.
Figure 12: Credit shock -downward shift of NPL categories
12.24%
5.54%
4.70% 4.24%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Current 50% Shift 80% Shift 100% Shift
CAR(%)
Shift into next catagory of NPLs
NPL Shock as downward shift of categories
Current
50% Shift
80% Shift
100% Shift

66
4.5.3 Fall in FSV of Mortgaged Collateral
The impact of fall in FSV of mortgaged collateral is calculated below-
Table 14: Credit Shock – fall in the FSV of Mortgaged Collateral
Magnitude of Shock
10% fall 20% fall 40% fall
Weighted Forced Sale
Value of Collateral
৳ 24,25,81,54,032 ৳ 24,25,81,54,032 ৳ 24,25,81,54,032
Increase in Provision ৳ 2,42,58,15,403 ৳ 4,85,16,30,806 ৳ 9,70,32,61,613
Revised CAR (%) 11.71% 11.17% 10.08%
(For detailed calculation, please see Annex-VI)
Weighted Forced Sale Value of Collateral =
(𝐹𝑆𝑉𝑆𝑆 × %𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 𝑆𝑆) + (𝐹𝑆𝑉𝐷𝐹 × %𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 𝐷𝐹) + (𝐹𝑆𝑉𝐵/𝐿 × %𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 𝐵/𝐿)
Highest 2.15% fall in the CAR happens for the worst case scenario of FSV shock. The
related graph is shown below-
Figure 13: Credit Shock – fall in the FSV of Mortgaged Collateral
12.24%
11.71%
11.17%
10.08%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Current 10% Fall 20% Fall 40% Fall
CAR(%)
Fall in the FSV of collateral
Shock while Collateral value Falling
Current
10% Fall
20% Fall
40% Fall

67
4.5.4 Increase of NPLs in a particular sector
In this particular shock, the impact of performing loan of Industry sector directly
downgraded to bad/loss category is shown:
Table 15: Credit Risk – increase in NPLs’ under B/L category in a sector
Magnitude of Shock
5% shock 10% shock 15% shock
Loan to Industries (working Capital) ৳ 3,38,85,74,442 ৳ 3,38,85,74,442 ৳ 3,38,85,74,442
Increase in Provision ৳ 16,94,28,722 ৳ 33,88,57,444 ৳ 50,82,86,166
Revised CAR (%) 12.20% 12.16% 12.13%
(For detailed calculation, please see Annex-VII)
So, only 0.11% fall in the CAR happens for the worst case scenario of credit shock. This is
absolutely in favor of Sonali Bank Limited because of they did not give much loan or
advances to the industry sector. The related graph is shown below-
Figure 14: Credit Risk – increase in NPLs’ under B/L category in a sector
12.24%
12.20%
12.16%
12.13%
12.06%
12.08%
12.10%
12.12%
12.14%
12.16%
12.18%
12.20%
12.22%
12.24%
12.26%
Current 5% shift 10% shift 15% shift
CAR(%)
PL of industry sector shifts to B/L catagory
Shock while Industry Sector fail to repay
Current
5% shift
10% shift
15% shift

68
4.5.5 Increase of NPLs due to default of some highest loan borrowers
Now, let us see the impact while performing loan of the highest loan borrowers directly
downgraded to bad/loss category. Let use 5%, 7.5% and 10%.
Table 16: Credit Shock – increase in NPLs’ due to Top 8 large loan borrowers’ failure
Magnitude of Shock
5% shift 7.5% shift 10% shift
Loan to Top 8 large loan borrowers ৳ 8,04,15,90,000 ৳ 8,04,15,90,000 ৳ 8,04,15,90,000
Increase in Provision ৳ 40,20,79,500 ৳ 60,31,19,250 ৳ 80,41,59,000
Revised CAR (%) 12.15% 12.10% 12.06%
(For detailed calculation, please see Annex-VIII)
As Sonali Bank Limited gave about 10% of their capital to those 8 large loan borrowers,
there is highest 0.17% fall in the CAR for the worst case scenario of credit shock. This is
absolutely in favor of Sonali Bank Limited because of they did not give much loan or
advances to the industry sector. The related graph is shown below-
Figure 15: Credit Shock – increase in NPLs’ due to Top 8 loan borrowers’ failure
12.24%
12.15%
12.10%
12.06%
11.95%
12.00%
12.05%
12.10%
12.15%
12.20%
12.25%
Current 5% shift 7.5% shift 10% shift
CAR(%)
some of top borrowers fail to repay
Shock while Top 8 Borrowers fail to repay
Current
5% shift
7.5% shift
10% shift

69
4.6 Equity Price Shock
At this stage of the study, we will see the impact of fall in stock market prices and the
consequences in the CAR.
The equity price shock of Sonali Bank Limited is-
Table 17: Equity price Risk – fall in Stock Prices
Magnitude of Shock
10% Fall 20% Fall 40% Fall
Total exposure in stock market ৳ 13,45,00,88,772 ৳ 13,45,00,88,772 ৳ 13,45,00,88,772
Fall in the stock price ৳ 1,34,50,08,877 ৳ 2,69,00,17,754 ৳ 5,38,00,35,509
Tax adjusted Loss ৳ 77,33,80,104 ৳ 1,54,67,60,209 ৳ 3,09,35,20,418
Revised CAR (%) 12.07% 11.90% 11.56%
(For detailed calculation, please see Annex-IX)
In these three scenarios, highest 0.68% fall can be found in the CAR for the worst case
scenario of equity price shock. The graph is shown below-
Figure 16: Equity price Shock
12.24%
12.07%
11.90%
11.56%
11.20%
11.40%
11.60%
11.80%
12.00%
12.20%
12.40%
Current 10% fall 20% fall 40% fall
CAR(%)
Fall in Stock prices
Stock Market Price Shock
Current
10% fall
20% fall
40% fall

70

71
5.1 Different Shocks from Stress Testing Scenarios
Stress Testing shall be carried out assuming three different hypothetical scenarios described
here:
5.1.1 Minor Level Shocks:
These represent small shocks to the risk factors. The level for different risk factors can,
however, vary. With the ‘Scenario-1’, this level of shock is shown.
5.1.2 Moderate Level Shocks:
It envisages medium level of shocks and the level is defined in each risk factor separately.
The ‘Scenario-2’, in every type of risk displays this level of shock.
5.1.2 Major Level Shocks:
It involves big shocks to all the risk factors and is also defined separately for each risk factor.
Major Level Shocks are tried to be expressed by the ‘Scenario-3’, in every type of risk.
 Assumptions behind each Scenario: The Stress Testing at this stage is only
a single factor sensitivity analysis. Each of the five risk factors has been given
shocks of three different levels. The magnitude of shock has been defined
separately for each risk factor for all the three levels of shocks.
Figure 17: Imagine how stress on your pencil damages what percent of that

72
5.2 Cumulative Credit Shock Scenarios of SBL
Total stress from aggregate 5 types of credit shock is shown in different scenarios of SBL
below (credit shock for total loss of capital in not included, but discussed later):
Table 18: Aggregate of 5 types of Credit Shocks
Cumulative impact of
Credit Shock
৳ 32,60,47,88,364 ৳ 36,26,54,38,639 ৳ 47,43,30,03,624
Tax adjusted Provision (N/A)
৳ 32,60,47,88,364 ৳ 36,26,54,38,639 ৳ 47,43,30,03,624
Revised Regulatory Capital
৳ 16,98,10,82,064 ৳ 13,32,04,31,789 ৳ 2,15,28,66,804
Revised RWA
৳ 3,72,65,95,11,636 ৳ 3,68,99,88,61,361 ৳ 3,57,83,12,96,376
Revised CAR (%)
4.56% 3.61% 0.60%
In scenario-3, it is shown the position of Sonali Bank Limited after a major shock in the
credit sector (Especially in NPLs). But, scenario-2, moderate shock is not much more shock
than the minor level of shock in scenario-1. It is easier to understand this by graph:
Figure 18: Aggregate of 5 types of Credit Shock Scenarios
If we see the impact of different levels of shock in individual credit shocks, the easiest way
to draw some pie charts and those charts are given below:
12.24%
4.56%
3.61%
0.60%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Current Credit
Scenario-1
Credit
Scenario-2
Credit
Scenario-3
CAR(%)
Cumulative credit shock scenarios
Aggregate of 5 types of Credit Shocks
Current
Credit Scenario-1
Credit Scenario-2
Credit Scenario-3

73
Figure 19: Cumulative Credit Shock in Scenario-1
2.65%
88.16%
7.44%
0.52%
1.23%
Parts of Cumulative Credit Minor Level Shock
Increase in NPLs
Downgrade of NPL Categories
Fall of FSV of Mortgage
A whole sector shifts into B/L
Top borrowers fail to repay
4.77%
79.26%
13.38%
0.93%
1.66%
Parts of Cumulative Credit Moderate Shock
Increase in NPLs

74
5.3 Cumulative Total Shock of SBL
Total stress from aggregate 5 types of shocks is shown in different scenarios of SBL below.
This includes credit shocks, interest rate shock, foreign exchange rate shock and equity price
shock. Total shock is divided into three levels of shocks as usual through three different
scenarios:
Table 19: Total shock of Sonali Bank Limited
Cumulative shocks ৳ 46,12,34,96,081 ৳ 63,30,28,54,073 ৳ 89,33,41,35,652
Tax adjusted Loss ৳ 40,37,80,45,301 ৳ 51,81,19,52,513 ৳ 71,52,61,54,540
Revised Capital ৳ 9,20,78,25,127 ৳ -2,22,60,82,085 ৳ -21,94,02,84,112
Revised RWA ৳ 3,64,88,62,54,699 ৳ 3,53,45,23,47,487 ৳ 3,33,73,81,45,460
Revised CAR (%) 2.52% -0.63% -6.57%
5.47%
71.31%
20.46%
1.07%
1.70%
Parts of Cumulative Credit Major Level Shock
Increase in NPLs

75
Again, there is a huge shock in scenario-1, which represents the minor level of shock.
Though this shows minor level of shock, this is really about moderate shock than the single
‘scenario-1’s of different shocks.
But total moderate level of shock in scenario-2 drives CAR to the negative side and scenario-
3, which means the major level of shock is really far below from the current CAR. Here is
the graphical presentation:
Figure 22: Total shock of Sonali Bank Limited
As in cumulative credit shock, if we want to see the impact of different level of shocks in
individual shock items, the easiest way to draw some pie charts.
Those charts are given below in order to simplify the category effects of each of the total
scenario.
12.24%
2.52%
-0.63%
-6.57%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
CAR(%)
Cumulative total shock scenarios
Cumulative Shock of SBL
Current
Total Scenario-1
Total Scenario-2
Total Scenario-3

76
Figure 23: Parts of Cumulative Total Scenario-1
70.69%
25.18%
1.21% 2.92%
Parts of Total Minor Level Shock
Credit Shock
Interest Rate Shock
FX rate Shock
Equity Price Shock
57.29%
36.70%
1.77% 4.25%
Parts of Total Moderate Level Shock
Credit Shock
Interest Rate Shock
FX rate Shock
Equity Price Shock

77
So, we can see that, with the increase of the level of shock, the impact of Interest Rate Shock
takes place of the credit shock in the Total Shock amount.
53.10%
39.01%
1.88%
6.02%
Parts of Total Major Level Shock
Credit Shock
Interest Rate Shock
FX rate Shock
Equity Price Shock

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